Russia struggles to attract Chinese capital to its Far East

Alexander Lopatnikov’s fresh scallops never fail to pull in Chinese tourists and businessmen in Vladivostok, a port city on Russia’s Pacific coast geographically closer to Beijing than Moscow.

Visitors love the local delicacy and, backed by Chinese investors, the Russian businessman exports scallops to the US, Japan and South Korea as well as China.

Last month during a visit to Beijing, Russian president Vladimir Putin told his Chinese counterpart Xi Jinping that co-operation between the regional neighbours had “reached an unprecedentedly high level and has become an example of how relations between states should be built in the present-day world”, noting that bilateral trade rose 24.5 per cent in 2018 to a record high of $108bn.

Despite a growing friendship between the two leaders that has helped strike a handful of headline-grabbing multibillion dollar energy and defence deals, a much-vaunted push by Moscow to drum up Chinese foreign direct investment in Russia’s Far East is failing to bring in capital

In the specially designed Free Port of Vladivostok, Mr Lopatnikov’s Chinese-owned scallop farming business is a rare exception. Just 3 per cent of the FPV’s projects involve Chinese capital, while only 2 per cent of China’s $140m foreign direct investment in Russia in 2017 landed in the country’s Far East

Russia set up the FPV, a special economic zone with tax and customs privileges that apply across five regions along Russia’s eastern coastline, in 2015.

Just 3% of the Free Port of Vladivostok’s projects involve Chinese capital © Bloomberg

Mr Putin called for a revival of Vladivostok’s status as a free port that the city held in the 19th century to develop the region adjacent to the fast-growing Asia Pacific and encourage deeper integration with its southern neighbour. The aim was to target small and medium-sized businesses from Asian countries as part of a concerted effort to pivot eastward for trade and investment as western ties soured after its 2014 annexation of Crimea.

But people involved in the port told the Financial Times that despite the beneficial tax regime and rules that streamline trade, Chinese investors are daunted by systematic problems that lie beyond the FPV — a small local market, the limited economic power of the region’s 6m people, and the lack of transport infrastructure.

“The amount of Chinese investments in the Russian Far East fully corresponds with the state of the market and infrastructure in the region,” said Ivan Zuenko, a research fellow at the Center for Asia Pacific Studies of the Far Eastern Branch of Russian Academy of Sciences. “It seems small only in comparison to the inflated expectations that Moscow and Beijing have set for the cross-border investment co-operation in recent years.”

In addition, Chinese companies are daunted by the often unreliable rules within the FPV itself. Existing residents complain that the investor contracts with the port are constantly being amended.

In 2018, the Tigre de Cristal casino, an FPV resident that aimed to serve as a pilot project for a gambling zone in the Russian Far East and attracted investors from Hong Kong, found itself on the verge of bankruptcy, when Moscow raised gambling taxes after the casino had already opened.

Russia’s legal system appears to be too complicated for the market entrants from China, Mr Lopatnikov said. “In our project, my priority is to make sure that everything complies with the Russian law,” he said, adding that Chinese businesses often struggle to make sense of the legislation by themselves.

Even with the support of Yuri Trutnev, the Kremlin’s top Far East official, Mr Lopatnikov’s He Xian Mariculture still faces issues with acquiring the land rights they are entitled to as an FPV resident.

“The Free Port of Vladivostok is a good brand. The city of Vladivostok is well known to many Chinese businessmen and it helps to promote the FPV regime. However, the FPV needs a clear development strategy,” said Olga Surikova, the Head of Far East Practice at KPMG in Russia.

The complexities of tax and customs legislation in Russia often undermine the benefits that the FPV promises its potential investors. “All FPV residents can use the special custom system of the free trade area, but in practice, this is not a popular choice as a resident is required to meet specific requirements and to build a customs infrastructure at its own expense. Only four FPV residents out of almost 1,200 have thus far used the FTA system,” said Ms Surikova.

And while the FPV was designed to attract new investment, Chinese business people who spoke to the FT in the economic zone said they had been working in Russia’s Far East for a long time.

“The Chinese successfully penetrated all the profitable industries in the Russian Far East in the early-mid-2000s,” said Denis Khlopushin, a lawyer and investment consultant in Vladivostok. The FPV is merely a pleasant bonus, said Russian businessmen who work with Chinese partners.

“A business will invest in an individual who they trust,” said Mr Lopatnikov. “[And] the quality of our product and the clean water of our seas.”

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